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A guide to investing in closed-end funds

Closed-end funds (“CEFs”) are actively managed mutual funds that trade on an exchange like a stock. CEFs can play an important role in a diversified portfolio providing the potential for income and capital appreciation.

More about closed-end funds

What are some of the myths surrounding Closed-end Funds?

BlackRock believes that CEFs can offer investors a strong income stream. However, there may be some misunderstandings in the market around them.

Myth #1: A CEF is a standard mutual fund that is closed off to new investors.Truth:Mutual funds and CEFs do share some commonalities, but there are important differences. Unlike a mutual fund, for example, a CEF trades on a stock exchange in the secondary market and typically does not redeem or issue shares on a daily basis, and a CEF is able to issue debt and preferred shares.

Myth #2: A CEF is an exchange-traded fund (ETF).Truth: CEFs share traits with ETFs, but there are notable differences. CEFs are actively managed by a team of professionals, whereas ETFs are passively managed and track an index, like the NASDAQ or Dow Jones Industrial Average. In addition, unlike an ETF, a CEF is able to issue debt or preferred shares.

Myth #3: High return of capital percentage is destructive for CEF returns.Truth: Return of capital is a complex tax concept. CEFs can use return of capital to lower investor tax obligations but it's just one consideration of suitability for that CEF. We advise care and due diligence around all variables when assessing the suitability of a particular CEF investment.

Myth #4: Share price performance is the best indicator of a CEF's return.Truth:BlackRock believes that price performance overlooks a large portion of a CEF's total return, but it is often the main metric offered on financial statements. Also, we believe that only by looking at a CEF's total return do investors get a clear picture. Total return takes into account any change in the CEF's share price, as well as any investor distributions received.

What are the risks associated with Closed-end Funds?

Like any investment product, closed-end funds offer opportunity but also come with a number of risks, some of which are listed below.

Market risk. Just like open-ended funds, closed-end funds are subject to market movements and volatility. The value of a CEF can decrease due to movements in the overall financial markets.

Interest rate risk. Changes in interest rate levels can directly impact income generated by a CEF. Funds that have a portfolio with a significant allocation to fixed income assets, like bonds, may be more exposed to this type of risk as interest rates change.

Other risks. CEFs are exposed to much of the same risk as other exchange traded products, including liquidity risk on the secondary market, credit risk, concentration risk and discount risk. If the CEF includes foreign market investments, it will be exposed to the typical foreign market risks, including currency, political and economic risk.

What are some important factors to consider when investing in Closed-end Funds?

BlackRock believes that it is important for an investor to understand a Closed-end Fund’s overall investment objective. This information is available in the Closed-end Fund’s prospectus and in shareholder reports. Understanding the investment objective will help investors determine whether the particular Closed-end Fund suits their investment goals and level of risk tolerance.

BlackRock believes that in order to get a more complete picture of a CEF's historical performance, it is important to consider the CEF’s total return. The total return calculation looks both at price return as well as any distributions, such as realized capital gains and income. We also believe that other important areas to assess may include asset composition, risk, duration, leveraging, managed distributions policy and covered call writing.

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Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses. Read the prospectus carefully before investing.

Investment return, price, yields and NAV will fluctuate with changes in market conditions. At the time of sale, your shares may have a market price that is above or below net asset value, and may be worth more or less than your original investment. There is no assurance that a fund will meet its investment objective.

The closing price and net asset value (NAV) of a fund’s shares will fluctuate with market conditions. Closed-end funds may trade at a premium to NAV but often trade at a discount. CEF shares are bought and sold at “market price” determined by competitive bidding on the stock exchange. Net asset value (NAV) is the value of all fund assets, less liabilities divided by the number of shares outstanding.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).